By on May 27th, 2020

How Much Should My Company Spend on Programmatic Ads?

How to Budget for Digital Ads and Calculate ROAS

As programmatic advertising continues to mature and increasingly becomes the new normal in running digital ads, the importance of leveraging programmatic technology to improve the ROI and ROAS of your digital ad campaigns can no longer be refuted.

Experts agree that programmatic advertising can have a huge impact on your brand achieving its goals, but the million-dollar question is this: How much should you spend on programmatic ads?

Why Spend Money on Programmatic Ads?

Programmatic ads allow you to reach a digital audience everywhere online that they are living their digital lives. Until recently, brands had no choice but to place media through traditional advertising channels such as TV, radio, and newspapers. In this day and age, such an approach is considered a “spray and pray” campaign—you may reach your target audience, but you’ll likely also spend money on showing your ads to many others outside of your target market, resulting in ineffective ad impressions and wasted ad spend.

Conversely, the programmatic advertising technology available today allows you to target your ideal customers directly and report on ad campaign results in unprecedented detail. Being able to review and understand how your ad dollars were invested and how much return you received on that investment through programmatic ad tech should be non-negotiable for your brand at this point.

Because programmatic ad tech has been adopted widely and quickly, many marketers still don’t understand all the things it can do. A common mistake we see in the industry is people limiting their digital advertising campaigns to the most common search and social platforms like Facebook and Google. While these channels are important components of most digital advertising strategies, they are only two websites of a vast and never-ending selection of sites available on the internet. Would you only invest in two stocks? Probably not. By the same logic, you should diversify the websites you use to show your digital ads in order to avoid putting all your proverbial eggs in one advertising basket.

ROAS for Programmatic Advertising

Return on ad spend (ROAS) is a hot topic right now, as it should be. There are a few things to consider when looking at your expected ROAS on programmatic ad spend.

First of all, what stage is your business in? Are you a start-up, or is your brand already well-established in your industry? Generating brand loyalty and awareness comes at a price, and it’s going to take much longer and cost more in ad spend in order to see a return on investment with a start-up or new company compared to an established brand.

Secondly, how crowded is your competitive landscape? Who are your competitors, and how much are they spending on advertising? If you are a big fish in a small pond, your ad dollars will go much farther than if you are a small fish in a big pond. If you have a highly competitive landscape, investing in paid media isn’t a choice—it’s a requirement for staying in business. The more competitors you have, the more you will need to spend and the longer it will take for you to see a return on that spend.

Even if you are in a relatively small competitive market, you still need to evaluate your competition. If you’re going after a market leader who’s been around for 50 years or more, is well-capitalized, and has a large brand following, you are going to need to spend a significant amount on ads if your goal is to usurp that industry leader.

Finally, how expensive is your product, and is it elastic or inelastic in demand? If your product is elastic or you have a product that most people can afford, you’re going to see a much faster and higher ROAS than other companies or industries. Conversely, if your product is expensive or inelastic, you are going to need to spend more to target your audience.

For instance, consider a product that sells for $39.99 versus a product that costs $4,000. You should see a relatively quick ROAS with a product that’s $39.99, because the sales cycle is shorter and people are willing to impulse-buy a product at a price point of $39.99. They’re far less likely to do so with a product that costs $4,000—but with the latter, it may be that closing a single sale could represent a complete return on your ad spend and then some.

How to Budget for Programmatic Ads

How Much to Spend on Digital Ads

How should your programmatic advertising budget relate to your business’s budget as a whole? As we’ve mentioned, a good ad spend strategy should mirror a good investment strategy. After all, this is an investment you’re making in your organization. Though it can vary depending on the three factors discussed in the section above, the general rule of thumb is to allocate between 5 and 20 percent of your gross revenue to re-invest in advertising.

This figure can be shocking to some, especially those that have not invested much in advertising before. That said, because programmatic advertising is so targeted and can offer such detailed reporting on the payoff of your advertising investment, programmatic ad campaigns can help ease some of those concerns and give you confidence in the way your dollars are being invested.

Balancing programmatic with search and social ads works well for driving brand awareness and new traffic to your site. This helps fill up your sales funnel and drive users farther down the line toward a conversion. Without the brand awareness and traffic piece of the puzzle, you won’t get the conversions you’re looking for. Within your advertising budget, best practices suggest having a marketing mix as follows:

  • 80 percent digital ads (run through programmatic ad buying technology)
  • 20 percent paid search and social ads (run through Facebook, Instagram, Google Ads, LinkedIn, etc.)

Depending on your brand, traditional advertising tactics such as TV, radio, and billboards may still have a place in the mix, but special care should be taken to not over-invest here due to the difficulty of tracking and understanding ROAS. You shouldn’t be spending more than 10 percent of your entire marketing budget on advertising in traditional media, and some brands (especially those catering to younger generations) may wish to eschew it entirely.

It’s important to note that your specific products, brand, or industry may dictate a slightly different mix, and budget should be reallocated depending on the awareness and conversions driven by each channel, but the above is a good rule of thumb for a product or service that needs to increase awareness and wants to see aggressive growth against competitors.

Calculating ROAS From Your Programmatic Ad Spend

There is a fairly straightforward formula to calculate your basic ROAS: The amount of revenue the ad spend generated, divided by the amount of money you invested in ad spend to begin with. This will give you a percentage. For example, if you made $300 on your ad campaign but only spent $100 to purchase the ads themselves, you’d have a 300 percent return on ad spend (ROAS).

However, this simple calculation is flawed and should be part of a larger calculation when determining your overall ROI from your programmatic ad spend. Programmatic advertising is especially great for generating top-of-funnel traffic, so only running calculations on your final revenue number will not accurately demonstrate the true ROI for this channel.

To get the right number, first you will need to calculate the lifetime value of a customer and then decide how much, in dollars, a lead or potential customer is worth to your brand. You should be using the lifetime value of a customer amount you determined in the calculation instead of the purely revenue-based calculation. When you’ve gained a customer, you can’t count just the revenue generated today—you need to account for all of the revenue that customer will bring you throughout their engagement with the brand.

What you really want to understand is the lifetime value of the customers generated from the advertising, divided by the amount of money you invested in ad spend. For example, if the lifetime value of a new customer is $250 and you received two new customers from the $100 ad spend, your true ROAS would be $500/$100, or 500 percent.

Finally, in addition to the above calculation, you’ll want to pull the website traffic you’ve been able to generate from the ad campaign. This is easily accessed through Google Analytics (as long as you set up proper UTM codes in advance). Let’s say this same $100 campaign generated 300 unique visits to your website, and you’ve determined that each visit to your website is worth $10 for your organization. Then we could say that $3,000 in ROAS was generated by the increase in website traffic that will be produced in the future. The real ROI for programmatic is actually the revenue of $500 based off lifetime value of the new customers, plus the value of your increase in website traffic, which is $3,000—so $3,500 total on a $100 investment.

 

Want to maximize your ROAS with cutting-edge programmatic ad campaigns? Get in touch with PrograMetrix today for a free consultation.

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Lacie Edgeman is a partner and VP of finance and operations at PrograMetrix.

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